Saturday, May 31, 2008

Technical Analysis

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I my last the "S&P 500" post I have summarized some facts that pointed to the oversold market. Yet, at the moment I wrote my outlook, the market was still weak to make strong statement about a possibility of the recovery, so, I made some comments based on the 60-day chart technical analysis about what I would like to see as a confirmation of the recovery.

On May 27, 2008 the stock market met my expectations - the SBV and advance decline issues oscillator started to move up, McClellan oscillator overcrossed zero line on  it's up move, RSI and Stochastics run above 30 and 20 respectively - the rest of the week the Nasdaq 100, S&P 5000 and DJI indexes spent in the recovery. By the end of the week the NASDAQ 100 recovered completely from the correction, while the S&P 500 and DJI are still far from the May 19 high.

By looking on the same set of the technical studies at the end of this week I may see some indication of the overbought market, yet, I would not state that the market is ready for another correction. Right now, I would say we have situation opposite to what we had last Saturday - we see some oversold levels, yet, many indicators on the charts are still bullish and we still may see further recovery (I refer to the 60-day index charts where one bar equal to one hour).

At the current moment MVO shows some oversold levels, we had high A/D levels we have RSI and Stochastics above 70 and 80. In the technical analysis, all of this indicates some degree of the oversold market in the analyzed timeframe,  yet, it does not mean that the stock market should drop now. It indicates that the market is ready for down turn, however, it's still shows the dominance of the bullish sentiment and a possibility of the further up move. In such situation I prefer set several conditions which may help me to make stronger conclusion about possible trend direction. As an example I may say that if I see the SBV decline on my index charts accompanied with advance/decline oscillator decline, if I see the RSI and Stochastics dropping below 70 and 30 respectively, if I see that the McClellan oscillator declines and crosses zero line then I may say that I see the confirmations of the sentiment changes and changes in the stock market trend.

I'll repeat myself - the technical analysis is not something that could be done once a month, the stock market is in the process of constant changes and technical indicators should be watched constantly.

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